Federal Reserve Chairman Ben S. Bernanke said small and midsize U.S. banks have a “vital role” in supporting the U.S. recovery and that he’s “confident” the firms will overcome challenges.
“Community banks face substantial challenges in the months and years to come, including still-difficult economic conditions, continued uncertainties in real estate and other key markets and a changing regulatory environment,” Bernanke said today in a speech to bankers in San Diego. “But community banks have faced difficult times before, and the industry has remained vibrant and resilient. I am confident that community banking will successfully navigate these new challenges as well.”
Bernanke, in his first comments since last week’s Fed policy meeting, didn’t elaborate on the outlook for the economy and monetary policy. He used the speech to draw lines between the biggest U.S. banks whose size and debt contributed to the financial crisis and are now the main target of new regulations, and smaller banks that expanded lending from mid-2008 to 2010.
“Focusing reform on our largest, most complex financial firms makes sense,” Bernanke said to the Independent Community Bankers of America’s annual conference. Last year’s Dodd-Frank Act aims to mitigate threats to financial stability posed by firms that investors may deem “too big to fail,” he said.
The “too-big-to-fail problem” creates “competitive distortions by enabling firms with large systemic footprints to fund themselves more cheaply than other firms because of the implicit subsidy of too-big-to-fail status,” Bernanke said. “This competitive distortion is not only unfair to smaller firms and damaging to competition today, but it also spurs further growth by the largest firms and more consolidation and concentration in the financial industry.”
Bernanke, addressing a current legislative skirmish, said the Fed is trying to ensure that a small-bank exemption from new regulations on debit-card “swipe” fee caps works as intended. The ICBA and other banking groups are lobbying against a Fed proposal implementing the caps as required by last year’s Dodd- Frank Act. The organization said last month that community banks may eliminate free products, fire workers and shelve expansion plans if the Fed imposes the caps.
“We are quite aware that the Congress, in writing this law, intended for smaller issuers to be exempt, carved out from the broader statute,” Bernanke said today. “In our rule- writing, we will do everything we can and use all the powers we have to try to make sure that that carve-out is effective,” he said to applause.
U.S. Senate and House lawmakers last week proposed legislation to delay the proposed fee caps. The Senate bill would put off implementation of the rule for two years while the House version would delay it for one year.
The Fed is “delighted” that Congress let it retain small- bank supervision powers in the Dodd-Frank Act that were initially threatened, Bernanke said as he credited the ICBA’s lobbying efforts. “We will be able to remain fully engaged with grass-roots America,” he said, one of several lines that also drew applause.
Bernanke said the Fed established a Board of Governors subcommittee focused on community and smaller regional banks, consisting of governors Elizabeth Duke and Sarah Bloom Raskin. The panel is “reviewing new policy proposals through the lens of the effect those proposals could have on smaller institutions,” the chairman said.
Fed officials at their March 15 meeting indicated they see an improving economy that lacks enough strength to warrant removing record monetary stimulus. They left the benchmark federal funds rate in a range of zero to 0.25 percent, where it’s been since December 2008. They also retained a pledge in place since March 2009 to keep the rate “exceptionally low” for an “extended period.”
Payrolls have increased by an average 134,000 a month for the past five months and the unemployment rate has dropped by almost 1 percentage point over three months to 8.9 percent in February, the lowest level since April 2009.
The housing market is still struggling to recover. A report today showed new-home sales fell to the slowest pace on record in February, while prices dropped to the lowest level since December 2003.
A survey of banks by the Fed released in January found that most firms expect loan delinquencies and charge-off rates to improve this year. Banks continued to ease standards and terms for commercial and industrial loans in the fourth quarter, the survey also showed. By contrast, changes in terms for consumer loans were “small and mixed,” it said.
“The financial crisis and its aftermath have hit some community banks especially hard, and those institutions will continue to need time to repair their balance sheets,” Bernanke said today. “Although we are not yet where we would like to be, the good news is that many community banks are recovering and reporting stronger performance.”
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